Compounding is your friend

Learn about Compound Interest - and how it can work for you!

"I’ve heard that term, but I’m not really sure what it means."

Are you in this camp?

Well, don't worry.

In just 3 mins you will be fully up to speed. Read on...

Take a look at the orange part on this graph. That’s the effect of compounding. Or put another way - it’s money your investment earns while you get on with your day job.

Whether its interest from a loan you gave to someone, rent from a property you own, dividends from a stock, or coupons from a bond; if you reinvest these returns (rather than spend them) alongside the regular investments you make, you will increase the amount you hold faster and therefore your future returns grow exponentially.

Let it snow

Imagine you have a snowball at the top of a hill. You push it down the hill and as it rolls it collects more snow and the snowball grows bigger.?

Think of the snowball at the top of the hill as your initial investment and as you continue to invest each month, your investment (snowball) grows bigger, and as it rolls down the hill the snowball gets even bigger the more snow is collected (the return on your investment).

That’s how compounding interest works.

Your other friend is time

Time represents how long your snowball has to roll down the hill.

The longer it has to gather snow (to compound) the bigger your snowball (total investment) will be. In the case of compound interest, the longer your money remains invested, the better it will be, because the interest compounds (snowballs) over time.

So in the example graph above if you invest ￡150 a month for 20 years you will have invested a total of ￡36,150.

If you stash it in a box under your mattress you’ll have the same amount in 20 years time.

If you leave it in the bank untouched, you may have slightly more in 20 years time (please note: we’re ignoring inflation and purchasing power in this example, but we’ll cover them in future newsletters).

However, if you invest it instead and achieve 10% annual return (roughly what the S&P500 achieved over the last 20 years - although there is no guarantee for the future) your investment would generate an extra ￡73,538 through compounding, creating a healthy total of ￡109,688. That's more than treble the amount of money you would have stashed under your mattress. Money makes money, so don't spend it or let it rest idle, make your money start working for you.

Can you find ￡150 a month?

So let’s suppose the answer to this is “yes”. Can you think of an occasion in the future when you might need ￡100,000?

We all have expensive life events around the corner. Whether it’s needing to pay school fees, a child going to uni, a once in a lifetime trip to Oz, a new car, a deposit for a first home…

Whatever it is, to put yourself in the position to generate life changing pots of money, it starts with improving your financial literacy so that you know how to consistently generate and save your ￡150 a month surplus. Then you have to understand how the current economic cycle might affect your investment, and finally what to do with it so you can achieve a healthy interest rate, and make sure that you do it consistently.

It’s not rocket science.

All you need is a little bit of knowledge, a little bit of money (in this example ￡150 a month) and a little bit of focus.

Believe us when we say that investing isn’t just for the wealthy.

Join us at Hug Academy and let’s learn and build wealth together.

Important note - Hug Academy is apolitical, we do not advocate any political or economic model as we believe they are all flawed. History has brought wealth inequality upon us, it is up to you how you choose to use the information presented here.